Description of Book Value. Explanation.

Definition Book Value. Description.

1. Book Value of a firm is a company's common stock
equity, as it appears on a balanced sheet.

It represents the net worth of a firm to its shareholders
("Shareholders Equity"),
based on the difference between its total assets and its liabilities.

Calculating Book Value. Take the Total Assets of a
firm and subtract the current liabilities, long-term liabilities and
Preferred Stock. If you divide
the book value by the number of shares issued, you get the Book Value per
Share.

Note that normally the book value of a firm is substantially
lower than its Market Value. The
bigger the difference between market value and Book Value, the more the company
is regarded by investors.

Book Value can help to find underpriced stocks and is also
an indication of the ultimate Liquidation
Value of a company.

2. The Book Value of an Asset on a balance sheet equals
the cost of the asset minus any accumulated
Depreciation. For example, a machine
is initially put on the books at its cost when purchased. Its value will be
reduced each year as depreciation is being charged.